Tokyo Shares Get a Second Look

Some Investors See Recent Decline in Stocks as a Buying Opportunity; 'Japan Is Now Undervalued'

By

Jonathan Cheng and

Kosaku Narioka

Updated June 18, 2013 12:49 a.m. ET

The spring swoon that has sent Japanese shares spiraling into a bear market is making life easier for
Peter Boardman.

The Chicago-based portfolio manager for Nuveen Investments was gobbling up shares of Japan's pharmaceutical companies, auto makers and home builders late in 2012 and early in 2013, when the Nikkei Stock Average was in the early stages of what would become a six-month, 80% advance to a multiyear high. As the rally reached its late stages this spring, he began dumping the shares when they hit his price targets, leaving his fund with more cash on hand than he would like.

ENLARGE

Prime Minister Shinzo Abe's policies have underpinned a rally in Japanese stocks in the past six months.
Agence France-Presse/Getty Images

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The recent fall in the Nikkei—the index has declined 17% from its 52-week high hit on May 22—is giving him a chance to redeploy those funds by snapping up his favorites again on the cheap.

"There are some companies that we've sold out of during this rally and now they're down 30%, so we might start adding back again," he said.

Some investors said the whipsaw trading in Tokyo over the past three weeks spells opportunity. Prime Minister Shinzo Abe and the
Bank of Japan
,
the country's central bank, are taking steps to try to repair the Japanese economy. While the ultimate success of those policies is uncertain, ample central-bank support for financial markets has sent the prices of many other asset classes, ranging from Treasurys to low-rated corporate bonds, soaring and earning Japanese shares another look.

The tumble in Japanese blue chips has taken valuations back down to levels that many investors consider attractive. The Nikkei trades at 14 times the profit analysts forecast at constituent companies over the year ending March 31, 2014. That is in line with its level last November and down from an April high of 23.

The comparable ratio on listed U.S. companies is 16, said
Hideyuki Ishiguro,
senior strategist in the investment strategy department at
Okasan Securities
.
He views the gap as evidence that "Japan is now undervalued."

ENLARGE

Demand for new homes has picked up in Japan. Above, a house under construction in Yokohama in April.
Bloomberg News

The dividend yield on the Nikkei, a measure of income generation that reflects expected annual payouts as a proportion of share price, was recently 1.7%, compared with 1.4% in May before shares started their retreat. That is below last November's level of 2.2% but compares favorably to the 0.84% yield on 10-year Japanese government debt.

"I think stocks are now being sold too much," Mr. Ishiguro said.

The Nikkei last week tumbled into a bear market, defined as a decline of 20% or more from a recent high. The index is down 5.4% in June but still up 25% this year.

Mr. Boardman, who lived in Japan for 15 years, points to opportunities like Osaka-based home builder
Sekisui House
Ltd.
, which saw profit quintuple from a year earlier in its most recent quarter as demand for new homes picked up following Mr. Abe's policy shift.

"It's not like the market has gone up and you have to wait for Godot to see the earnings," Mr. Boardman said.

The selloff is pushing even those who are yet to be persuaded about Japan's turnaround to consider another round of investments in the country.
William Kennedy,
who manages a $6.7 billion international stock mutual fund for Fidelity Investments from his base in London, left Japan more than a decade ago and has long been a skeptic about prospects for the nation's stock market.

Even so, last week he was waking up early to hit the phones with management teams of companies he is considering investing in and listening to the latest utterances from Mr. Abe and the Bank of Japan.

Mr. Kennedy's Fidelity International Discovery fund lists Japan as its biggest country, making up about one-fifth of the portfolio. His concern is whether Japan's measures will go much deeper than usual.

"For the moment, it's a credibility issue," said
Robert Horrocks,
the San Francisco-based chief investment officer and portfolio manager for Matthews Asia, an Asia-focused mutual-fund manager that manages $25.3 billion in assets.

Mr. Horrocks sees fundamental overhauls starting to gain momentum. As a result, he is buying specialized exporters that he said haven't run up as much and would benefit from a combination of a weaker yen and Japan's expertise in high-end industries. Mr. Horrocks particularly focuses on companies selling factory automation equipment and machine tools, and advanced materials like graphite and carbon fibers.

He said the run-up and pullback in the Nikkei highlight the risks of investing at a time of low interest rates, tepid economic growth and heavy government involvement in markets. Even so, he said, there are signs that investing in Japan will pay off for those willing to stick around.

"We can't time these waves of sentiments, but the tide still seems to be going in the right direction," Mr. Horrocks said.

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